A British exit from the European Union (EU) would dampen the prospects for UK commercial real estate and would require ongoing monitoring of ratings on listed real estate investors and structured finance in CMBS or RMBS, Standard & Poor’s (S&P) has warned.
In a report entitled ‘Brexit and the risks for UK real estate’, the ratings agency said that uncertainty leading up to the 23 June vote is likely to have a “somewhat paralyzing” effect on investor decisions in the UK real estate sector. In the event of a vote in favour of leaving the EU, prolonged uncertainty during the subsequent exit negotiations could turn investor sentiment more negative, it said.
The boost to real estate values seen in recent years could be reversed, while cost-conscious financial services firms could use a Brexit as a reason to reduce London office space. As a result, S&P predicted that a withdrawal from the EU would have most impact on the London office sector. The firm pointed out that more than 40 percent of securitised UK real estate and more than 95 percent of UK office properties in CMBS are located in London.
The agency also said that the impact of a Brexit on CMBS would also depend on what employment and free trade laws were agreed between the UK and EU following a Brexit.
“A decline in values in the event of a Brexit or a recession could cause the downgrades of some bonds if such an economic decline is greater than our base-case assumption,” said S&P. “For RMBS bonds, a Brexit may impact house prices, primarily in London and the south-east but not limited to those areas, and could cause ratings to be reviewed, especially those with larger concentrations in the affected areas. Similarly, we may need to review CMBS bonds with significant exposure to London real estate in the event that Brexit affected commercial real estate values.”
For ratings on individual real estate investment companies, S&P said that Brexit would be overall a negative rating event that it would need to evaluate versus the “financial cushion” that firms have amassed at their current rating level.
“Overall, while the precise impact of Brexit is difficult to gauge, should it occur, we believe it could have negative consequences for UK real estate,” the report concluded. “The long-term impact would depend on how the exit is negotiated. Nonetheless the potential negotiation uncertainty could add to capital market volatility and create negative sentiment for real estate investment.”